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Chicago Pursues Deal to Change Pension Funding

Mayor Rahm Emanuel said property taxes would double or services would be cut if Chicago didn’t get pension relief soon.Credit
Taylor Glascock for The New York Times

SPRINGFIELD, Ill. — First came the State of Illinois, now comes the City of Chicago.

The hard-fought passage here Tuesday of a landmark bill trimming retirement benefits for state workers, aimed at fixing the vastly underfunded pension system, has become instantly relevant to the nation’s third-largest city, which has its own pension systems in various stages of financial collapse.

And if anything, the reckoning in Chicago is even nearer and more difficult than the one the state had faced, putting its Democratic mayor, Rahm Emanuel, in a difficult position under a tight deadline.

Under state law, the city must increase its contributions to its workers’ pension funds by $590 million in 2015, to a total annual contribution of $1.4 billion for current and future retirees. If no pension deal can be reached by November of next year, when the city will draft its next budget, the city will either have to raise taxes or cut services or some combination of both.

But city officials are hoping there is now momentum on their side to force a compromise solution. They come armed not only with Tuesday’s state vote but also with a federal judge’s ruling, also on Tuesday, to formally send Detroit into bankruptcy. Chicago is not facing bankruptcy, but the Detroit case produced a development being watched closely by cities and unions across the country: It explicitly permitted changes to public pension funds to help the city shed its debts and reorganize.

“Should Chicago fail to get pension relief soon, we will be faced with a 2015 budget that will either double city property taxes or eliminate the vital services that people rely on,” Mr. Emanuel said in an email on Wednesday. “To avoid that, we need a balanced approach. We need a plan that is fair to both workers and taxpayers, and gives them both the certainty and security they are looking for.”

“Without reform and revenue, we cannot make the critical investments in our future — and the future of our children and neighborhoods,” the mayor wrote. “Without reform and revenue, we cannot be the city that we want to be.”

One credit rating agency, Fitch Ratings, estimated that if there is no deal to reduce pension benefits for city workers and no cuts in services, the city will have to increase property taxes by 35 percent.

Actually, the situation is even worse, said Laurence Msall, president of the Civic Federation, a government watchdog group. The Fitch study looked only at police and firefighter pensions. If you include pensions for teachers, laborers and other municipal employees, property taxes in that situation would have to more than double, he said.

Angry union officials say they will file suit in state court in coming days to have the new state law overturned, a process that could last more than a year, and they argue that no further deals involving the more than 62,000 Chicago workers should be enacted until that litigation plays out. City officials say they cannot wait that long.

“There’s a definite hole in the budget, and neither taxpayers or employees should be expected to fill it alone,” said Kelley Quinn, a spokeswoman for the mayor. “The longer we delay, the worse the problem gets.”

Union leaders are not in such a rush.

“There certainly seems to be a will to address Chicago’s pensions, and obviously the mayor is pushing that vigorously,” said Daniel J. Montgomery, president of the Illinois Federation of Teachers. “But if they are looking to duplicate what they did to the state systems, they’ve got a few legal hurdles.”

For one thing, he said, the Illinois Constitution has “very clear and precise language” that guarantees that retirement benefits cannot be lowered. The ruling on Tuesday by the judge overseeing Detroit’s bankruptcy that federal law trumps the Michigan Constitution when it comes to lowering benefits does not apply in Illinois, Mr. Montgomery said.

“The City of Chicago is not bankrupt,” he said. “It is an entirely different situation.”

Michael K. Shields, president of Chicago’s Fraternal Order of Police, said there was no way to compare the new state bill with the situation faced by his members. “This pension bill is not one size fits all,” he said.

He pointed out that much of the benefit cuts in the state law came from changes in the way annual cost-of-living raises are dispensed. While state workers received annual raises of 3 percent that compounded every year, Chicago police officers and firefighters receive a flat raise of at most 3 percent that does not compound. So more benefit cuts would have to be found elsewhere for those city workers.

Other union leaders were even more blunt.

Karen Lewis, president of the Chicago Teachers Union, which represents 30,000 people, called the whole process an unnecessary attempt on behalf of bankers and the financial community to force government workers out of defined benefit pension plans and into 401(k) plans.

“Our actual problem with this bill is that, once again, the people who are behind this thing are the very people who stand to gain from our members going into 401(k)’s,” Ms. Lewis said. “They will get those fees from administering the 401(k)’s. These people are hypocrites, and they should be ashamed to open their mouths.”

Relations between the mayor and the city’s teachers’ union had already been strained by a bitter strike last year that kept classes closed for eight days.

What has also attracted little attention, compared with the emotional public debate that surrounded passage of the state pensions law, is the deal reached in the legislature last month involving pensions for Chicago parks workers, whose unfunded pension liability grew from $77 million in 2003 to $550 million in 2012, a 615 percent increase. That deal may well provide a better template for a deal covering other city workers, city officials and others contend.

Under the deal, parks workers will no longer be able to retire at age 50 with 30 years of service. Instead, to get full benefits, they will have to work to age 58, except for those who will be 45 or older on Jan. 1, 2015, who will retain the old deal. Annual cost of living increases will also be limited, and the city will have to borrow money in 2015 by issuing one-time pension bonds.

If all goes well, the pension fund for parks workers will be 90 percent funded by 2049 and 100 percent by 2053.

City officials, meanwhile, insist that Chicago has no other choice but to come up with some sort of a solution by November, including some measure of pension cuts.

If so, then prepare for a fight, union officials say.

“We’re going to take to the airwaves and knock on doors, do whatever we have to do to let people know what’s happening here is an injustice,” said Thomas E. Ryan Jr., president of the Chicago Firefighters Union Local 2. “All we ask for when we no longer can do this job is to live with some kind of dignity. All we want is what was promised to us when we were hired. That’s it. We’re not asking for anything special.”

Correction: December 10, 2013

An article on Thursday about Chicago’s pursuit of a deal to change pension funding described incorrectly the annual raises for city police officers and firefighters. Only those born before Jan. 1, 1955, receive a 3 percent raise; those born after that date receive a smaller increase, depending on several factors, including date of hire.

Steven Yaccino contributed reporting from Chicago.

A version of this article appears in print on December 5, 2013, on page A1 of the New York edition with the headline: Chicago Pursues Deal to Change Pension Funding. Order Reprints|Today's Paper|Subscribe